Bank downbeat on house prices

Deutsche Bank analysts believe there is little chance of rapid house price growth in the next few years as households deleverage and remain reluctant to take on big new debts.

In its monthly housing market update, the bank said house price growth was likely to be about 2.5 per cent annually until at least the end of 2012.

The bank also played down supply shortages of new housing as unlikely to drive strong price growth, and said the Reserve Bank of Australia’s monetary policy would be unlikely to support an aggressive increase in market activity.

“We expect household deleveraging to be the overwhelming influence on house price dynamics over the next few years," the report said.

The bank mapped three possible household credit scenarios, with the most likely being the ratio of household debt to income falling 10 percentage points to 163.4 per cent. This would lead to 2.5 per cent annual house price growth, or unchanged in real terms.

However, if household debt fell to its December 2004 level of 150 per cent, there would be a further 10 per cent decline in house prices over the next year.

If household debt rose 10 percentage points to 183.4 per cent, house prices would boom at a comparable level to that seen in the past two years.

House prices accelerated their downward slide in July, according to the latest RP Data-Rismark figures, with the greatest falls at the prestige end.

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Deutsche Bank said this would probably stabilise owing to sound structural foundations to the housing market, and limited capital gains were the most likely scenario over the next few years. Housing loan arrears had seen a “significant" increase since late 2009 but with relatively minor implications for the broader market.

First-home buyer demand was much weaker than in 2008 and 2009 but their share of new finance, at 12.3 per cent, was “a touch below their average share since 1991 of 16 per cent".

There was also a potential for a re-bound in overseas migration, which had slowed since 2008, owing to demand from the resources sector.

The bank found new building was outpacing the demand for housing in Victoria, while New South Wales, Queensland and Western Australia were not keeping up with demand. However, this would not play a major role in pushing up house prices.

“With recent house price movements dominated by the aftermath effects of housing stimulus during the financial crisis . . . we find it hard to envisage significant pressure stemming from the current pace of ‘undersupply’," the report said.

One reason for this was that the RBA was unlikely to alter monetary policy settings to an environment that would support strong price increases, despite Deutsche Bank’s prediction of a “slightly lower" cash rate later this year.